Nice to Look At, but It Doesn't Make Electricity

Anyone fortunate enough to be familiar with the beautiful reddish cliffs prevalent in Nevada and Arizona knows that sandstone can be thing of beauty. But one company reminds us that you can't convert it to electricity.

Foundation Coal Holdings(NYSE:FCL) reported a net loss of more than $32 million for the third quarter, compared with a gain of $1.9 million a year earlier. Despite realizing coal prices as much as 43% higher than 2007 levels, a laundry list of operational difficulties have combined with some backfiring hedges to lead the company into the red.

Some of the challenges Foundation encountered were company-specific. Of the 800,000-ton production shortfall reported from its eastern mines, more than 80% of that figure corresponded to unfavorable geology at the Emerald Mine in West Virginia. Where the company expected to find coal, it ran into sandstone. (By late September, though, the company reinstated the longwall and is back into the coal.) Another major source of the quarter's woes were several diesel and coal hedges that had the opposite of their intended impact -- they forced the company to take on $11.2 million in unrealized losses.

Helping to clue Fools in to some regional issues to remain watchful for, Foundation noted increased regulatory activity, wage increases, and a shortage of skilled labor as broad challenges facing the entire eastern coal-producing region. The company estimates that site inspections eroded quarterly production by 100,000 tons. Although the release mentions the added uncertainty surrounding permits and regulations regarding surface mining in the east, Foundation is similar to CONSOL Energy(NYSE:CNX) in that only a tiny fraction of its eastern coal is surface-mined. Given the legal battles and permitting difficulties, these companies are far better situated than surface specialists such as Massey Energy(NYSE:MEE) or International Coal(NYSE:ICO).

Although the company reduced 2008 guidance, Foundation echoed the same bullish long-term outlook that we heard recently from top producer Peabody Energy(NYSE:BTU). Foundation stated, "Despite concerns of a global economic slowdown, Asian demand continues to grow and will continue to drive demand for seaborne coal for the foreseeable future." Nonetheless, explicit warnings from bellwether companies such as POSCO(NYSE:PKX) suggest some short-term reverberations from the global financial crisis are certainly afoot. If recent results from coal-carrying railroad companies such as Norfolk Southern(NYSE:NSC) are any indication, short-term effects on the coal industry will enter from a robust starting point indeed.